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The recent spread of the highly infectious Omicron Covid-19 variant could weigh on China’s economic growth target of 5.5% for 2022. The country is experiencing its biggest spike in Covid infections in more than two years, urging the government to lockdown cities and regions again. New daily Covid cases remained well above 1,000 over the weekend in China, while the country reported two new Covid-19 deaths for the first time since January 2021. Overall, 19 out of 31 provinces in China have reported Covid cases.
Battling the fresh outbreak of coronavirus, officials have vowed to double down on the zero-tolerance strategy, that started since the initial outbreak began in Wuhan in 2019. Amongst others, the government has imposed new movement restrictions for schools, malls, and companies in one of China’s financial centres, Shanghai. The authorities have also sealed off an entire province, Jilin in the north-eastern part of China, for the first time since the lockdown in Wuhan and Hebei provinces in early 2020.
Meanwhile, some parts of China that were under strict lockdowns before are easing restrictions again. Declaring that the outbreak was “controllable,” authorities relaxed a week-long lockdown in the tech hub of Shenzhen and the manufacturing hub of Dongguan, both located in the southern province of Guangdong.
President Xi Jinping last week at a politburo meeting stressed the need to swiftly control local clustered outbreaks. He urged for tighter virus controls at ports of entry, but still “minimising the impact of the pandemic on the country’s economy.”
China especially vulnerable to Omicron
While the zero-Covid approach has been able to hold the infection at bay via targeted lockdowns, mass testing, and travel restrictions, experts are concerned about the fresh lockdowns and their potential impact on China’s economic growth.
Ben Sheehan, Senior Investment Specialist Equities at asset manager abrdn, said the fresh lockdowns in China are “very concerning”. “Especially given that Guangdong Province, of which Shenzhen is a major city, makes up 10-12% of China’s GDP and Shanghai makes up about 4%.”
However, according to Sheehan, Chinese authorities have long track record of balancing a policy of Covid-19 elimination, while maintaining economic activity. “While consumer spending has faced headwinds due to the rolling lockdowns and negative sentiment from a softer property market, industrial activity has remained robust and China has maintained its role as a dependable counter-party in global trade,” says the investment expert from abrdn.
According to Louis Kuijs, Asia-Pacific chief economist at S&P Global Ratings, Omicron is a key risk for China’s domestic demand, output and, possibly, supply chains. “While the zero-Covid policy has not led to major economic disruption so far, the restrictions are making China particularly vulnerable to the more contagious Omicron variant.”
Former US-Food and Drug Administration commissioner Dr. Scott Gottlieb told CNBC, that the population’s lack of widespread natural immunity is pushing up cases in China. He suggests that the strict but successful zero-Covid policy had created this extreme vulnerability. Gottlieb furthermore attributes the renewed spread partly to the limited effectiveness of the Chinese vaccines against the new variant.
This will most likely lead to the current strict policies to continue, according to Maggie Zheng, Fund Manager, Chinese Equities at Schroders. For the Chinese economy this means that with borders remaining shut, “any consumption recovery will need to be supported by the domestic market for now.”
Kai Kong Chay, Senior Portfolio Manager, Greater China Equities, at Manulife Investment Management, expects the aggressive Covid-19 restrictionsto at least dampen consumption temporarily in major cities like Shanghai or Shenzhen.
Analysts from Australia and New Zealand Banking Group (ANZ) fear China’s economic growth to be “significantly affected” if the lockdowns are extended.
China’s Covid-19 flare-up threatening global supply chains
The reimposition of wide lockdowns in China has also refreshed concerns about global supply chain disruptions. China is the world’s biggest exporter, one third of the world’s entire manufacturing capacity is based in China. Shanghai and Shenzhen account for more than 16% of China’s exports, according to the Economist.
Bloomberg Economics’ Chang Shu and David Qu wrote in a note that the lockdown in Shenzhen will hit output in industries such as tech and electronics, feeding into global supply chains. “Previous steps to contain virus flareups left manufacturing unscathed for the most part.”
Major multinational corporations like Toyota Motor Corp, Volkswagen AG, Tesla and iPhone assembler Foxconn have halted operations in Chinese cities and warned about shipment delays.
Also China’s main ports are feeling the pressure of movement restrictions. While China has kept ports operating amid Covid outbreaks, container ship lines outside major ports are growing by the day, due to delay in container loading. According to Refinitiv ship tracking data, there has been a notable build-up in ships at anchor in recent days from ports in manufacturing export hubs like Shenzhen, Qingdao, Shanghai and Ningbo-Zhoushan.
“Should the lockdowns be more prolonged, they could cause more significant disruption and exacerbate global supply chains”, said Robin Parbrook, Fund Manager, Asian Equities at Schroders.
